CFM98245 - Interest restriction: carry forward rules: interest allowance and new 'topco'

TIOPA10/S395A CTA10/S724A

The normal rule is that unused interest allowance is an attribute of a group which cannot be accessed by another group. FA19 introduced a limited exception to this rule, effective for transactions taking place on or after 29 October 2018. A similar limited exception applies in relation to excess debt cap, see CFM98255.

This rule may apply to the insertion of a new ‘topco’ between the ultimate parent of a group and its shareholders. It is intended to have a similar effect to existing relaxations of ‘no carry-forward on change of ownership’ rules in CTA10/PART14/CH 2-6, which relate, for example to carry-forward of trading losses, non-trading loan relationship deficits and losses of a UK property business. As in the case of those relaxations, the conditions that must be satisfied are set out in CTA10/S724A.

The transaction envisaged by S724A is that all of the issued share capital of an existing company (C) is a acquired by a new company (N), or if there is a scheme of reconstruction (under the effect of UK law of an equivalent foreign provision) whereby all of the shareholders in C instead become shareholders in N and the shares in C are cancelled.

A continuity condition must be met. The essential elements are that:

  • The only consideration given to the former shareholders of C is in the form of shares in N;
  • All former shareholders in C get shares in N of equivalent classes; and
  • The proportional interests of the shareholders remain the same, or as nearly as may be, the same.

Where these requirements are met, any unused interest allowance of the C group, as at the end of its last period of account, will be treated as if it were unused interest allowance of the N group.

The interest allowance will be determined as if the C group’s periods of account, which end the day before the qualifying takeover, are the N group’s period of account.

As a result, the carry-forward rules in TIOPA10/S393-395 (CFM98240) are applied as if the C group and N group were the same group. The new group is effectively treated as a continuation of the old group